Sunday, November 09, 2008

The Global Financial Crisis

Some random thoughts on the global financial crisis:

People keep calling it a liquidity problem, while it's actually a solvency problem. But in a world of fractional reserve banking and insane leveraging, there's not that much difference between the two, I guess.

Fractional reserve banking may be the root cause of all the evils by causing unchecked expansion of credit and money supply, but would a world where all the currencies are backed by gold be capable of sustaining the prosperity of everybody (or even lifting more people out of poverty), when considering the rapid rise in the world population in the last hundred or so years?

I was impressed enough with the tenets of Austrian economics -- due in no small measure to reading Mike Shedlock's blog -- to go out and buy Economics in One Lesson. While the arguments against government meddling for short term gains are impeccable in theory, one wonders whether it is possible to apply the theory to the real world without causing misery to large segments of the population. Consider this argument against minimum wages:

When such consequences are pointed out, there are those who reply: "Very well; if it is true that the X industry cannot exist except by paying starvation wages, then it will be just as well if the minimum wage puts it out of existence altogether." But this brave pronouncement overlooks the realities. It overlooks, first of all, that consumers will suffer the loss of this product. It forgets, in the second place, that it is merely condemning the people who worked in that industry to unemployment. And it ignores, finally, that bad as were the wages paid in the X industry, they were the best among all the alternatives that seemed open to the workers in that industry; otherwise the workers would have gone into another. If, therefore, the X industry is driven out of existence by a minimum wage law, then the workers previously employed in that industry would be forced to turn to alternative courses that seemed less attractive to them in the first place.

In reality, how easy is it for someone to change their career midway through? Unless the assumption is that since it's a minimum wage job we are talking about, one does not need significant retraining for a new career. Also, people sometimes don't want to relocate in favour of a higher paying job, and are forced to put up with lower wages.

One keeps reading about the next round of CDS auctions being the ticking bomb that is going to blow us all sky high, but these D-days seem to come and go without much ado.